THE IMPACT OF MONETARY POLICY ON COMMERCIAL BANK

In order to have a clear understanding of the impact of monetary policy on commercial banks, it is important to highlight what monetary policy is all about.

The term monetary policy is defined as the credit control measures adopted by Central Banks to control the supply of money as an instrument for achieving the objectives of general economic policy.  It involves expansions and contraction of money supply, the manipulation of interest rate to make borrowing easier or more difficult depending on the prevailing condition of economy.  Expansionary measure is adopted when the central bank want to increase money supply.

Generally the objectives of monetary policy includes maintenance of balance of payment, economic grow, provision of employment and price stability.

In order to actualize the above objective, the government found out that they could use only commercial banks.  This is due to the nature of their services.

Moreover, commercial banks in pursuance of their profit motive are inclined to channeling funds to the most profitable sector of the economy rather than the sectors preferred by the government the tendency of this however is that the overall interest of the nation will be jeopardized.

Thus in order to avoid this the central monetary authority (CBN) had to institute machineries and instrument to ensure the strict observance and adherence of commercial banks towards monetary policy.

However the introduction of these instruments affect the profit making of commercial banks as they are not given free hand to channel their funds to the most profitable sector.

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